Top ten Massachusetts ISI: 

One major consensus about economic development in Massachusetts is that MA’s economy is currently transitioning from hosting a large scale of industrialized activities based on manufacturing processes toward a model of production mostly based on knowledge creation and innovation. That basically has meant for the Commonwealth a process of painful industry specialization.

As it is the case for Massachusetts, economic geographers have identified this process as the information technology revolution, which has impacted negatively manufacturing labor with its corresponding consequences on regional economies. What is called Post-Fordism has become the concept that summarizes flexibility and fragmentation in the industrial production process. Post-Fordism has basically meant for industrialized economies like MA’s a substantial loss of manufacturing jobs. As this blog has cited before, Pollard and Storper (1996) describe how this effect of net losses in manufacturing jobs reached 20% in Massachusetts-like regions starting in 1977 to 1987 –only one decade.

Having said that MA’s economy is in transition, we take a look at the statistics that better describe such a specialization process and better inform the sources of the State’ economic growth. We believe that a good proxy for capturing such phenomena is the Industrial Specialization Index (ISI) produced by the Bureau of Economic Analysis at the US department of Commerce. Graph # 1 shows the different trends of specialization. A score above 100 in the index means that MA has a higher concentration of the given industry compared to the average of the same US industry.

ISI is basically the share that a given industry takes on the size of MA’s GDP, divided by the share that the same industry takes form the size of US’s GDP. Again, a score above 100 means that the state has a more concentrated industry than the average state in United States. ISI measures concentration and agglomeration of industries within the state by comparing them to US industries’ average.

Therefore, we took all the industry sectors for Massachusetts and filtered the results based on the ISI score. Ten industries classified the threshold of 100 score:

• Computer and electronic manufacturing.
• Miscellaneous manufacturing.
• Transit and ground passenger transportation.
• Publishing industries, except internet.
• Securities, commodity contract, investments.
• Funds, trusts, and other financial vehicles.
• Other professional, scientific and technical services.
• Educational services.
• Hospital and nursing and residential care facilities.
• Computer systems design and related services.

These results are consistent with what the literature review revealed about the economic transition that we called the third industrial revolution. That is basically that Massachusetts currently specializes on knowledge-based businesses. As the results show, all ten economic activities heavily rely on intensive application of knowledge as well as they depend on innovation in order to survive and compete.

Graph #1.

Not only does the Industry Specialization Index show the degree to which MA economy specializes, but also it does show some economic strengths and weakness. The most extreme and worrisome trend is the one depicted by the orange line, which happens to be “Funds, trusts, and other financial vehicles”. As Graph # 1 shows, “Funds, trusts…” industry is very unstable featuring huge variations for the periods following the “Dotcom bubble” crisis of 2000, and the Great Recession of 2008. Remarkably, the pink line on the graph appears to be the most stable one showing apparently less variability. That pink line depicts the Educational Services industry.  Not only has the Educational Services industry the highest score on the specialization index, but also it shows the highest level of resilience while severe economic crisis. Unlike the “Funds…” and related business industry, Educational Services does not vary substantially for the two mentioned period of crisis: “Dotcom bubble” 2000 and the Great Recession. All other sectors depicted in the graph are strongly related to the Educational services sector, which means the presence of an economic cluster that hovers around knowledge. That makes Massachusetts a Knowledge-based economy, strictly speaking.

Massachusetts Unemployment Rate: 

The core purpose of public policy research in economic development is to build a predicting model that explains the creation of jobs in a highly specialized-knowledge-based economy. In terms of descriptive statistics such a goal requires taking a look at the unemployment rate since the beginning of the mentioned economic transition, which is roughly 1976 when advanced economies started to lose manufacturing sector jobs. Such descriptive statistics will allow users to identify the lowest unemployment rate of the recent Massachusetts’ economic history. likewise,  the lowest unemployment rate will allow us to set a “full employment” level base year for Massachusetts’. In other words, the lowest unemployment rate will indicate the year in which a perfect industry combination yielded the economy’s “full employment”.

Graph # 2.

Graph # 2 shows data collected by the Bureau of Labor Statistics for Massachusetts Unemployment rate for the period 1976-2012. The lowest rate for almost four decades is 2.6%, which was achieved on the year of 2000. This statistic (2.6%) may represent “full employment” given that it is actually close to the statistical standard error (1.6) of the sample used by the Current Population Survey (CPS).

Although we recognize that the lowest unemployment rate was reached right before the “Dotcom bubble”, we still think it provides insightful elements for the analysis to the extent that 2000 may be interpreted as the peak for the right combination of economic growth and job creation. That is, a successful system of trickle-down effect through economic growth and job creation. Therefore, we set 2.6% as the level of “full employment” and the year of 2000 as the perfect equation for economic production in a knowledge based economy.

What has changed in the GDP since MA achieved “full employment” in 2000? 

The previous two descriptive statistics (ISI and Unemployment Rate) show which industries generate economic growth in MA, and when those industries employed the highest amount of the available workforce. In other words, the previous statistics help us to understand which MA’s economic sectors create wealth; and, when those economic sectors trickled-down such wealth in form of employment. Therefore, if the identified top ten industries cited above are the ones that are actually creating and attracting wealth toward the Commonwealth, then the year of 2000 becomes the benchmark for those industries to create a trickle-down effect through job creation. Furthermore, setting 2000 as a benchmark year for the perfect industry combination that creates the trickle-down effect allows us to analyze the most recent changes in the economy that have brought the same rate up to 6.9%. Graph # 3 depicts an indexed (2000 base year) and comparative analysis of the MA’s GDP evolution by the ten selected and leading MA industries. In other words, Graph # 3 gives us the opportunity to analyze comparatively MA’s top ten industries and its changes since 2000 (our base year) until 2011.

Graph # 3.

If we were allowed to set the year of 2000 as the benchmark for trickle-down effect through job creation, then the differences may signify the losses on employments that have brought the unemployment rate up to 6.9%. Thus, major changes in the composition of the MA’s GDP have been seen in the “Funds and other financial vehicles” sector. The drop in such sector has been dramatic since its indexed levels in 2000. Likewise, “Miscellaneous manufacturing” has also dropped from its optimal levels in 2000. “Computers and electronic products manufacturing” sector has also proved to be very volatile since 2000 as well as “Securities, commodity contracts, investments”. Notice that two of these three economic sectors are strongly tight to speculative capital activities. Both sectors are somehow related to the knowledge economy, but unlike the latter, its geographical mobility is greater. That would explain such industries’ fluctuation in the MA’s GDP. On the other hand, Graph # 3 also shows what has risen since 2000. Health care sector leads the change in growing participation on the MA’s GDP. Professional and scientific services have also gone up in GDP share, as well as the Publishing industry. So has Ground transportation. Finally, the sector pertaining Education services –which is arguably MA’s biggest strengths has also risen since 2000 levels.

What has changed in Employment conditions since MA achieved “full employment” in 2000? 

Based on the previous statistics on the 2000-indexed-MA’s GDP, and in terms of wealth generation and job creation, we would expect the economic sectors that have created both wealth and GDP expansion since 2000 to be the ones that must have created a proportional amount of employment for the economy for the same period. On the flip side, we would expect that the economic sectors that have decreased its participation in the MA’s GDP must have been the ones that cut employments from the economy for the same period. In other words, data on employment levels for the selected industries should mirror data on GDP expansion. This assumption leads us to more of the descriptive statistics on employment in MA. Thus, analyzing the differences in MA’s GDP between 2000 and 2011 gives us the chance to interpret how the industry equation for an ideal economic growth and trickle-down effect through job creation (2000) has changed to the extent that it has affected negatively the Unemployment rate. Graph # 4 shows the total full-time and part time employment by our selection of growing and specialized industries. The graph # 4 shows -again- an index that allows us to compare the levels of employment for the benchmark year of “full employment” or 2000. Industries that have decreased its level of employment in the graphs are said to have lost share in the ideal “full employment” labor market, equally, those that have increased its participation are said to have gain employments from it.

Graph # 4.

Despite the fact that “Computer manufacturing…” related sector has shown a high volatile performance on its share as the 2000-indexed MA’s GDP shows, theses economic activities have decreased in levels of employment dramatically since 2000. In turn, “Miscellaneous manufacturing” sector has also declined its level of employment while also dropping its share of the 2000-indexed MA’s GDP. “Publishing industry” has a downward trend too, although it has grown share in the 2000-indexed MA’s GDP. On the other hand, Health care related industries have increased its employment levels as well as the sector of “Transit and ground transportation”. “Securities, commodity contracts and investments” sector has also risen in employment since 2000 levels. Finally, as expected, “Education Services” has also increased levels of employment since 2000.